Do you have a child or grandchild who held down a summer job or a part-time job in 2000? Or, some loved one who is just starting in the work force at a relatively low wage? Chances are, that person will qualify for a deductible IRA.
In most cases, he or she will come out ahead with a Roth IRA instead. The youngster probably will gain more from tax-free income than from an upfront deduction. Say your 16-year-old granddaughter earned $2,000 last year in a summer job. She qualifies to deduct a $2,000 contribution to a regular IRA.
However, her income probably will be sheltered by the standard deduction, which offsets up to $4,400 in earned income for 2000. With no taxable income, she would gain nothing from a regular IRA deduction and future withdrawals would be taxed. Alternatively, suppose your 23-year-old son earned $25,000 last year, which puts him in a 15% tax bracket. A $2,000 IRA deduction would be worth only $300 in tax savings.
Between ages 23 and 59-36 years-his $2,000 will grow to $32,000, assuming 8% annual returns. In a regular IRA, every penny that comes out will be taxed-you son might wind up $20,000 or less. Assume, instead, that your son puts only $1,700 into a Roth IRA: the $300 difference represents the tax paid on $2,000 worth of earnings. Over the next 36 years, at 8% per year, that money will grow to more than $27,000, which would be totally tax-free after age 59-1/2.
